Public Information Notice No. 01/4

Public Information Notice: IMF Concludes Article IV Consultation with Mozambique

January 17, 2001

On December 18, 2000, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mozambique.¹

Background

Since the conclusion of the last Article IV consultation in June 1999, economic developments in Mozambique have been marked by a slowdown in economic growth, a rekindling of inflation, and a weakening of the external current account, all linked in large part to the devastating floods that affected the country in February-March 2000. Flood reconstruction and production at the recently opened Mozal aluminum smelter helped contain the economic slowdown, and real GDP growth for 2000 is now expected at 3.8 percent. The exchange rate in real effective terms appreciated moderately during the year.

Inflation rose in the immediate aftermath of the floods, and continued to increase thereafter, to a 12-month rate of 16.8 percent in October 2000, reflecting in part a larger-than-expected monetary growth. The 12-month rate of expansion of broad money increased from 35 percent at end-1999 to 44 percent in September 2000. A recent monetary tightening, however, promises a slowdown of inflation—which declined to 15.7 percent in November—although further oil price increases might pose an upward risk.

Two important commercial banks have been experiencing liquidity and solvency problems, constraining the ability of the central bank to follow a tight monetary policy during the past year. The government, as a minority shareholder, and the private shareholders have agreed to recapitalize the banks. The completion of this task and the strengthening of bank supervision are important government objectives for the next few months.

Government revenue was in line with expectations during the first three quarters of 2000. The first year of operation of the value-added tax, which was introduced in June 1999, produced encouraging results. As part of its medium-term objective of broadening the revenue base, the government has recently tightened the administration of tax and customs exemptions and initiated a more fundamental reform of tax policy and tax administration. Preparation for this included a review of the system of tax and customs exemptions.

Government expenditure in 2000 is expected to increase significantly with respect to 1999, as a result of outlays for flood reconstruction, higher social expenditure, a higher government wage bill, and onetime outlays for bank recapitalization.

In the governance, transparency, and legal reform areas, a review of fiscal transparency in the context of the code of good practices on fiscal transparency was completed; the publication of quarterly budget execution reports was started; and a new commercial code was drafted. However, the adoption of a strategic plan for the justice system expected for October 2000 will be delayed as the government envisages a reform that encompasses all levels of the judicial system. To prepare for close monitoring of the poverty-reduction strategy, the National Statistical Institute published in mid-2000 a comprehensive set of social and development indicators.

Executive Board Assessment

Executive Directors commended the Mozambican authorities for their generally good record of policy implementation despite the devastating floods at the beginning of the year. They welcomed the progress made on structural reforms under the PRGF-supported program, and noted the authorities' commitment to, and strong ownership of the reforms. Looking ahead, Directors considered that, in order to establish the conditions for economic recovery and equitable growth, special emphasis will need to be placed on budget management, prudent monetary and credit policy, and structural reforms.

Directors welcomed the authorities' objective of increasing the revenue-to-GDP ratio, as well as Fund technical assistance in this area. They stressed the importance of proceeding with the rationalization of tax and customs exemptions, improvements in tax administration, and the planned comprehensive reform of the tax system. These measures to increase revenues would help sustain the increasing expenditure needs, especially in the social sector. Directors underscored the importance of further improving expenditure management, accountability, and the transparency of government operations. They welcomed the publication of a quarterly budget execution report and the review of fiscal transparency undertaken in the context of the code of good practices on fiscal transparency. Directors underscored the importance of improving the tracking of poverty-related expenditures, particularly with regard to the use of resources that are freed up as a result of HIPC debt relief. They welcomed the authorities' intention to include information on poverty-related expenditures in the quarterly budget execution reports, beginning in the first quarter of 2001.

Directors noted that the rapid monetary expansion in 2000 poses a risk to macroeconomic stability, and stressed the importance of bringing inflation down to single digits. They therefore welcomed the recent actions by the central bank to reassert monetary control. They also welcomed the authorities' initiative of publishing a more representative exchange rate and considered it an important step to improve the functioning of the foreign exchange market.

On structural reforms, Directors commended the authorities for the progress made in addressing the liquidity and solvency problems of two commercial banks, and stressed the importance of restoring health in the banking sector. They urged the authorities to strictly enforce the safeguard measures put in place, and generally to strengthen prudential regulations and supervision of the banking sector. Directors also called for early adoption of the strategic plan for the justice system. Directors welcomed the authorities' commitment to trade liberalization. They urged them to stay the course of trade liberalization, and to resolve the problems of the cashew processing industry. A few Directors also stressed the need to avoid increasing protection of the sugar sector.

Directors urged the authorities to continue to improve the accuracy, coverage, and timeliness of statistical data.

Directors encouraged the authorities to accept the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement.